06MEXICO1776

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RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM

DE RUEHME #1776/01 0951557

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R 051557Z APR 06

FM AMEMBASSY MEXICO

TO RUEHC/SECSTATE WASHDC 0019

INFO RUEATRS/DEPT OF TREASURY WASHDC

RUCPDOC/DEPT OF COMMERCE WASHDC

RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE

UNCLAS SECTION 01 OF 02 MEXICO 001776

SIPDIS

SENSITIVE

SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EB/IFD
STATE PASS USAID FOR LAC: MARK CARRATO
TREASURY FOR IA MEXICO DESK: JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA : ANDREW RUDMAN

E.O. 12958: N/A

TAGS: ECON EFIN EINV PGOV MX

SUBJECT: MEXICO'S BANKING SECTOR CONTINUES EXPANSION IN 2005

SUMMARY

IQ. (U) In 2005, Mexico's banking sector enjoyed continued
rapid expansion in both loans and profits. Mortgage and
consumer credit grew 35% and 48% respectively, while loans to
businesses grew a modest 5%. Banking profits grew 83% over
2004 to USD 4.4 billion, prompting criticism that the banks
are "too profitable." Finance Secretary Francisco Gil Diaz
and others have defended the banking system as an engine of
growth that has succeeded because of improved operations and
customer service. (Note: None of the figures in this report
include Mexico's government-owned development banks. End
note.) End summary.

CREDIT SOARED

1.2. (U) Despite oft-cited public sentiment that Mexican banks
have been tight with their lending, Mexico's banking sector
expanded credit at phenomenal rates in 2005, following
equally healthy lending growth in 2004. In 2005, Mexico's
full-service banks grew their overall loan portfolios to the
private sector (mortgage, consumer, and business credit)

21.5% over 2004, to USD 78 billion. Consumer loans and
mortgages grew 48% and 35% respectively. Loans to businesses
(other than financial institutions) grew by a modest 5.4
percent, though businesses are still the banks' main
customers .

AS DID PROFITS

1.3. (U) According to the National Banking and Securities
Commission (CNBV), banks' net profits rose 83% in 2005, to
USD 4.4 billion. The banking sector continued to be
dominated by six banks, which together hold 86% of Mexico's
private sector banking assets. Of these, only one, Banorte,
the fifth largest, is Mexican. The others, in order of
assets held, are BBVA Bancomer (Spanish), Banamex (owned by
Citigroup), Santander Serfin (Spanish), HSBC (British), and
Scotiabank Inverlat (Canadian) .

ELICITING SOME CRITICISM

1.4. (U) The banking sectors' profits have prompted some

criticism, which is partly fueled by the banks 1 foreign
ownership. Central Bank Governor Guillermo Ortiz and
Competition Commission head Eduardo Perez Motta have both
voiced public criticism of the sector's profitability.
Defenders of the banking sector, including CNBV president
Jonathan Davis and Finance Secretary Francisco Gil Diaz,
while admitting there was room for improvement, say banks'
profits are directly related to improved operations and
customer service.

COMMENT

15. (SBU) The banking sector in Mexico has yet to recover from
the 1995 collapse and the high rates of credit growth are
largely due to the small base from which credit is growing.
Banking credit as a percentage of GDP still greatly lags
behind most industrialized economies. Furthermore, banking
services have yet to reach most of the population — a fact
accepted by banking leaders. However, the banks have indeed
stepped up their lending efforts - that is, after all, their
business. Competition has lead to rapidly falling interest
rates that are at historically low levels, making credit much
more accessible. Low inflation and macroeconomic stability
have also allowed for repayment terms stretching to 20 or
more years at fixed rates - a phenomenon unheard of just a
few years ago. Criticizing the success of the banks, to
which many attribute Mexico ' s economic rebound and its
projected future economic growth, is not productive.

Vo . (SBU) Long-standing criticism that banks are not lending
enough to businesses is also unfair. Although growth in
lending to businesses has been slower than to consumers and

MEXICO 00001776 002 OF 002

homeowners, the banks rightly point out that many small- and
medium-sized businesses simply don't have the needed
expertise and documented financial performance to take
advantage of banking credit. Furthermore, most large
businesses have access to cheaper financing through the
financial markets and many businesses of all sizes can and do
obtain credit from suppliers and other sources. The success
of the banking sector is something that should be applauded
and will hopefully continue unimpeded by government
intervention, helping propel Mexico's economy despite itself.
GARZA